What is a hire purchase agreement?
A hire purchase agreement is a type of lease agreement which contains an option to purchase at the end of it. After an initial deposit – the amount of which can vary significantly – the outstanding balance is then paid off in monthly instalments.
Ownership passes after all the instalments have been made and the hirer exercises the option to purchase the goods. The option to purchase is normally a nominal fee which has no bearing on the market value of the goods.
In the case of a hire purchase finance agreement, the instalments, even if they include a contractual balloon instalment, amortise the balance outstanding down to zero.
Hire purchase agreements are a popular way of funding vehicles, and can be used to finance a brand new car with a view to owning it at the end of the contract.
How does hire purchase work?
A hire purchase agreement usually involves an upfront deposit on the asset, after which the payments are determined according to the length of the agreement. The duration of the hire purchase agreement can vary to suit the customer’s budget and business needs.
The interest rates charged as part of the hire purchase terms can be either fixed or variable.
A feature of a hire purchase agreement is that the customer is able to own the asset at the end of the agreement. This can be useful as you may be able to use this as part exchange when you reach the point of replacement.
However, it is important to note that you will be responsible for the servicing and maintenance of the asset, especially when it comes to vehicle hire purchase, unless a specific maintenance contract is entered into.
In summary, hire purchase agreements appeal to customers that want to retain ownership of their assets but spread the payment over a period of time. However, the customer will bear the residual value risk and be responsible for all the servicing and maintenance requirements which may require in-house expertise and management resources.
What are the benefits of a hire purchase agreement?
• Regular instalments spread the cost over the course of the finance agreement
• Frees up vital capital in the business
• Low deposit often available
• Fixed and variable interest rates are usually available
• Business purchases may benefit from corporation tax savings. The hirer can offset the interest against taxable profits and claim capital allowances on the capital.
• On-balance sheet funding allows you to maximise your asset base
• The security taken by the lender is the asset, not a charge over the business as a whole
• Ownership of the asset passes at the end of the hire purchase agreement, subject to payment of all instalments and the option-to-purchase fee.
Where can I find a hire purchase deal?
Hire purchase finance agreements can be organised by specialised providers such as Anglo Scottish Asset Finance. Get in touch with the team at Anglo Scottish Asset Finance for expert advice on a hire purchase agreement that works for you.
Considering other asset finance options too? Don’t hesitate to ask about your options when you get in touch.